“Silver Price: The Least You Should Worry About”

I heard some disturbing reports about silver supply
last month that I felt every investor should know. And while precious
metals are currently in correction mode, the long-term concerns with
supply won’t disappear anytime soon. In attempt to get a handle on the bullion market, I spoke to Andy
Schectman of Miles Franklin, who has contacts that run deep in the
industry. What he sees everyday might just compel you to count how many
ounces you own…

Jeff Clark: Andy, tell us about your industry contacts and how you get the information you're privy to.

Andy Schectman: We source our product from three of the largest six primary U.S. mint
distributors. Having 20 years of experience with these sources, as well
as the dealers in the secondary market, we're as tied into the industry
as anyone.

Jeff: You made some interesting
comments to me about supply and premiums. Tell us what you’re hearing
and seeing in the bullion market right now.

Andy: I feel as though I'm the boy who cries wolf or that I've been beating
the same drum for too long. But in reality, it has been my feeling since
late 2007 that ultimately this market will be defined less by the price
going parabolic – which I think ultimately will happen – and more by a
lack of supply. You see occasional reports that state it’s just a lack
of refined silver or lack of silver in investable form. But as far as
I'm concerned, there is a major supply deficit issue, and it’s getting
worse.

Take the U.S. Mint, for example. Right now, as we talk, you
can barely get silver Eagles. We’re seeing delivery delays of three to
four weeks, and premium hikes of a dollar or more in the last three
weeks. Most of the suppliers in the country are reluctant to take large
orders on silver Eagles because they don’t know (a) when they’ll get
them, and (b) what the premiums will be when they arrive.

I was
talking to the head of Prudential Bache and asked him about silver
Eagles. He said, "You know, as soon as the allocations come in, they’re
sold out. We can't keep them in." This is coming from one of the largest
distributors of U.S. Mint products in the country.

And this is
all occurring in an environment that has only minimal participation by
the masses. Few people in this country have ever even held a gold or
silver coin. So, if it's this difficult to get bullion now, what's it
going to be like when it becomes evident to the masses they need to buy?
This is what keeps me up at night.

Jeff: Some
analysts say it's a bottleneck issue, that the mints have enough stock
but just need more time or more workers to fabricate the metal into the
bars and coins customers want.

Andy: No, I don’t believe that. What business do you know that if they had
that much profit potential wouldn’t increase production and hire more
workers to meet demand? To me, the “inefficient model” argument is an
excuse.

Look at what the U.S. Mint alone has done: they haven’t
made the platinum Eagle since 2008. They make maybe one-tenth as many
gold Buffalos as they do gold Eagles. They’ve made hardly any
fractional-ounce gold Eagles. Heck, they can’t even keep up with the
demand for the products they do offer. Does that sound like a bottleneck
to you? Or is it because there is far more demand than there is
available supply? It’s pretty clear to me it’s the latter.

Jeff: What are you seeing in the secondary market; are investors selling bullion?

Andy: There is no secondary market. Absolutely none. Nobody is selling back
anything, at least not to us. Think about that: if this was a
traditional investment and your portfolio went up 100% in the last year,
like silver has, you’d think some investors would take some profits and
ride the rest out – but nobody’s selling anything.

This is why I
think the lack of supply is the single biggest issue in this market. And
in time, I think it will become much more obvious. [Ed. Note: We’re using the term “secondary market” in this instance to mean sellers of bullion and not the scrap market.]

There
are only five major mints – U.S., Canada, South Africa, Austria and
Australia. Yes, there is a Chinese Mint and a couple Swiss Mints and
some private refiners, but they amount to very little in the overall
scheme of things. We’re in a situation where the mints are limiting the
selection and raising the premiums, and this is occurring at a time when
most people own no bullion. As it becomes more apparent that people
want bullion instead of paper dollars, I think you'll see premiums go
parabolic and supply get even tighter.

Jeff: Are you getting a lot of new buyers to the bullion market?

Andy: More than ever. One of the interesting things we’re seeing is a lot of
younger people dipping a toe in the water, buying little bits of silver
here and there. We’re also seeing bigger orders, as well as more
frequent phone calls from financial advisers asking us if we can help
their clients. So yes, the base is broadening.

Jeff: That's very interesting. So are you seeing more demand for gold or silver right now?

Andy: 90% of the new business is in silver. And I think that’s indicative of
the state of the economy. People are trying to get into precious metals,
but they think gold is too high. I think they’re buying silver because
they realize the fundamentals for owning gold also apply to silver. They
think the profit potential is better in silver, too. This has actually
made the supply for gold better than it is for silver right now, and a
lot of that has to do with price.

Jeff: Why are premiums fluctuating so frequently?

Andy: Premiums are almost impossible to gauge right now. Because the
availability of product is getting smaller and smaller and the demand is
getting stronger and stronger, premiums are changing literally
overnight. And it doesn’t take many large investors around the country
to force premiums higher.

The net of this is that it's really hard for us to be able to say what the premium for a specific product will be two weeks out.

Andy: I think it’s coming from their clients. It’s my impression that people
are taking it upon themselves to study a little bit more, to be more
accountable for their assets, and I think they’re telling their
financial advisors to buy gold. And in some cases it’s because they
don’t want a paper derivative.

It’s no secret that financial
advisors don’t like gold and silver. Once money goes to a bullion
dealer, it’s not coming back to a stock portfolio anytime soon, so they
discredit it. But now it’s my impression they’re being asked by their
clients to buy it. So it’s not necessarily because the financial advisor
wants gold as much as it is the client requesting it.

Here’s a
good example. There’s a firm here in Minneapolis that represents the
Pillsbury fortune, and they asked me to talk to their partners about
precious metals a few months ago. At the end of the conversation they
said, "Okay, we're going to place an order for one of our clients.” Upon
hearing it was for one client, I thought it would be in the range of
$50,000 to $100,000. Well, the order was for $5 million.

There are
two astonishing things about this. First, that’s twice as big as the
largest order I've ever had. It was one order, for one client, who’s
brand new to the market. How many more potential buyers are out there
like that? Second, they made it abundantly clear to me that it was out
of pressure from one of their clients that they sought me out. So
clients are increasingly demanding bullion, regardless of what their
financial advisers say.

Jeff: Hearing about all this new buying might make some think we’re near a top in the market. Could that be the case?

Andy: No, no [chuckles].
I think Richard Russell says it best: "Bull markets die of exhaustion
and overparticipation." Well, we’re nowhere near that point when so few
people in this country own gold and silver. Heck, I’m a bullion dealer,
and most of my peers don’t own any gold and silver! Yes, you're seeing
more commercials, but there are just as many commercials to buy gold as
there are to sell it. I think that’s an indication this market is not
exhausted.

Remember that in the year 2000 everyone and his brother
had some NASDAQ shares. That’s an example of an exhausted or
overparticipated market. We’re nowhere near that.

Jeff: Where are the best premiums for silver?

Andy: The very best buy in silver right now is junk silver. And by the way, I
think the term “junk” is unfair. It isn't junk anymore. It used to be
junk in the ‘90s when silver was 3 or 4 bucks an ounce and it was sold
basically at melt value and carried no premium. So I’d call it “90%
dimes and quarters.” Anyway, junk silver has the lowest premium right
now and, in my opinion, offers the best upside potential.

Next
would be 10- and 100-ounce silver bars. And then one-ounce silver coins –
but the Eagles are very expensive at the moment, if you can get them.
The Austrian Philharmonic has the best value in a one-ounce silver coin
right now, and they’re available. But again, premiums for all silver
coins are escalating.

Jeff: What about gold?

Andy: Gold
is not as bad. In fact, I would say that gold availability is decent
right now for one-ounce coins and bars. There isn’t much available in
fractionals. And Buffalos are still kind of hard to get. Other than
that, the one-ounce coins with decent availability are Canadian Maple
Leafs, Australian Kangaroos, and Krugerrands. And they all have decent
premiums.

Jeff: So the take-away message is what?

Andy: First, I think you said it best with your recommendation to
“accumulate.” Not only will it smooth out the volatility in price and
premiums you pay, it will also give you a bird in the hand. If I'm right
about this market, and I really believe I am, it will be defined by
lack of availability of refined product. To combat that, just accumulate
month in and month out, and be thankful when you're able to get what
you want.

Second, it’s about the number of ounces you own. You
want to get as many ounces as you can without being penny wise and pound
foolish. Stick with the most recognized products – don’t buy
1,000-ounce bars, for example, because they’re illiquid. You want to
maximize your liquidity, and you do that by buying the most common forms
of bullion – one-ounce coins, bars, and rounds; 10- and 100-ounce
products; and junk silver.

Last, keep in mind that premium and
commission are two different animals. Commission is what the dealers
make on top of the premium. Premium is what the industry bears. So if
the U.S. Mint is selling silver Eagles for $3 over spot to the
distributors, that's before they’re marked up to the public. So even
though the “premium” is high, you're actually going to get most of that
back when you sell. [Ed Note: It’s not uncommon for the buyer to recapture most of the premium when they sell, particularly during periods of high demand.]

So,
buy gold and silver while it’s available, even if you don’t buy it from
me, because if I'm right, getting it at all could soon be your biggest
challenge.

Jeff: Thanks for your insights, Andy.

We just concluded our spring Casey Summit, "The Next Few Years,"
a truly blockbuster event that included detailed investment
recommendations from 35 of the most successful experts. We covered all
facets of precious metals, energy, interest rates, the economy, real
estate, and more. It's the single best way to prepare both your finances
and family for what's ahead. You can catch every minute of the entire
Summit with a full 20-hour audio CD set, available here.]